Deflation Begins, Feds Ignore It

LARGEST PRICE DROP EVER

Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount. The Labor Department said Wednesday that consumer prices fell by 1 percent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 percent decline analysts expected. Core consumer prices, which exclude food and energy, fell by 0.1 percent last month, the first drop in core prices in more than a quarter-century.

The big drop in inflation reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Food costs rose 0.3 percent in October, just half the increase of September, as dairy products and fruit showed declines. There were price declines for clothing, new and used cars, and airline fares.

Excluding food and energy, consumer prices fell by 0.1 percent, the first decline in core prices since a similar drop in December 1982 as the country was battling the effects of a severe recession.

RECORD ENERGY DROP

For October, energy prices fell by a record 8.6 percent, led by a record 14.2 percent drop in gasoline prices. Since prices at the pump have continued to fall this month, analysts are looking for a big decline in energy costs in November as well. The nationwide average for regular gasoline now stands at $2.07, down 33 cents since the start of the month, according to the Energy Information Agency, and well below record-highs above $4 per gallon this summer.

RECORD HOUSING SLUMP

In other economic news, the Commerce Department reported that construction of new homes and apartments fell by 4.5 percent in October to an annual rate of 791,000 units. That was the slowest construction pace on records going back to 1959 and underscored that housing remains caught in a severe slump.

WORLDWIDE RECESSION

Many analysts believe the current downturn will be the worst recession since the 1981-82 slump.

The big retreat in consumer prices represented a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control. Food prices are still 6.1 percent above where they were a year ago, reflecting big increases in past months as grocery stores hiked costs to reflect the higher cost of transportation. Since that time, the economy has been jolted by the most serious financial crisis in seven decades with all the turbulence expected to push the country into a severe and prolonged recession.

The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities.

FIRST DEFLATION SINCE GREAT DEPRESSION

Analysts predicted further declines in the months ahead as retailers struggle to attract consumers who are being battered by rising unemployment and the weak economy. "This report clearly reflects the crunch in discretionary consumers' spending which is likely to persist for the foreseeable future," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

While some are worried that the price retreat could raise the prospect of a deflation, a prolonged bout of falling prices, most economists believe that current conditions are not likely to set the stage for such a development, which last occurred in the U.S. during the Great Depression. Over the past 12 months, consumer prices have risen by 3.7 percent. That is substantially below the 17-year high of a 12-month price increase of 5.6 percent set this summer. Core prices are up 2.2 percent over the past 12 months.

This price moderation is giving the Federal Reserve the room it needs to cut interest rates to battle the economic slump. The central bank is expected to cut the federal funds rate, the interest that banks charge each other, down to 0.5 percent at its December meeting, even lower than the 1 percent where the funds rate stands currently. The 1 percent funds rate ties the record low for the past half century.

INCOMES FALLING TOO

The big drop in inflation meant workers got a break in their discretionary incomes although average weekly earnings, after adjusting for inflation, were still down by 0.9 percent from a year ago. However, that was smaller than the 2.5 percent decrease seen in the prior two months.

http://news.yahoo.com/s/ap/20081119/ap_on_bi_go_ec_fi/economy